Bazdarich commentary: Growth has slowed, so Fed should stop worrying

CBS.MarketWatch.com

LOS ANGELES (CBS.MW) -- A book titled "Innumeracy" argues that Americans don't understand numbers.One strain of innumeracy in the financial markets these days has analysts mistaking a high level of economic activity -- in the gross domestic product -- for a strong growth rate in GDP.

It is understood that the Fed will tighten rates further on GDP growth of above 4 percent.However, the arguments proffered in favor of continued tightening usually support a nice level of GDP, not a strong growth rate. This is a crucial difference.

Consider construction.Bond bears often point to strong construction activity, and, yes, housing surged between October 1998 and March 1999. Since March, however, yields have jumped, housing starts have fallen slightly and construction spending has declined across the board.While the level of construction activity is still "strong," its growth rate has gone from plus 21.5 percent in the first quarter to minus 10 percent so far in second.

Furthermore, there is reason to expect slower growth in other sectors as well.Retail sales were another major contributor to rapid first-quarter GDP growth, thanks to their blistering 15.8 percent real growth.Things have cooled from the second quarter, with such sales growing "only" 5.3 percent.

Yes, sales levels are still favorable, and even their growth rates are not shabby.Nevertheless, they still show a sharp deceleration in the second quarter, and this will have comparable effects on second-quarter GDP growth.

Available second-quarter data on foreign trade, inventories and capital spending are still incomplete, but if they continue any of the softness they displayed earlier in the year, the plunge in retail sales growth would be enough to slow goods-GDP growth alongside construction.

Why have retail sales growth slowed, even if only a bit?The answer lies in the growth rates of other variables.

Again, interest rates are still said to be low, but they have jumped considerably from late 1998 levels.Consumer confidence is said to be high, but it is barely above the levels of the summer of 1998; its growth rate is essentially zero.Unemployment is low, but the rates of growth of jobs and incomes have been falling for the last 18 months.

Household wealth is still surging with stock prices.However, the slumping stock market last fall did not prevent retail sales from surging in October and afterward. Plunging interest rates were the dominant factor then, and the early 1999 spike in yields, along with steadily slowing job and income growth, seems to be the overriding factor slowing sales growth now.

I could go on, but you get the point.

To argue effectively for further increases in bond yields, don't talk about economic effects of the rate of unemployment, the level of consumer confidence, the level of housing starts or the supposedly low levels of interest rates.Talk instead about the growth rate of jobs, the growth in consumer confidence, the growth in housing starts and the direction of bond yields, etc. On these grounds, the trends are going in the wrong direction.

The economy is not going into the tank.But its growth rate is receding to a pace that will cease worrying the markets and the Fed.Be growth-minded instead of level-headed, and you will see that.

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